The last time we explored one of the indicators of the health of the general economy: housing starts. Now, let’s turn our attention to another indicator that may provide insight to the direction of the economy.
Composite Leading Index
The Composite Leading Index (CLI) is reported monthly and is a lead indicator of the health of the economy going forward. This index has been instrumental in providing signs of the direction of the economy since World War II. In fact, it has predicted every recession since that period, but also errs on the conservative side, predicting four recessions that did not occur.
If the CLI is increasing, it is a sign of a growing economy, and if the index increases by more than 2-3% annually, it is a sign of a robust economy. To the contrary, if the CLI declines more than 3/10 of 1% for three consecutive months and by one full percentage point over that period, a recession is usually on the horizon in approximately four to six months with a 70% probability.
If one examines the last three months of data available, code red conditions exist. The index has met condition one by declining over 3/10 of 1%, and it has met condition two by declining a total of 1.3% over that period of time. It looks like a tough fall and winter for the United States economy.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected].